Should We Cut Gasoline Consumption by 50%?

Beginning in 2008, any car or SUV that cannot meet a fuel efficiency standard of 30 miles per gallon will have to pay a tax of $1,000 per year.  That is the proposal of three top executives at Fred Alger Management, a money management firm, delivered in a letter they sent to President George W. Bush recently. The firm says the proposed tax could generate "as much as $200 billion in revenue" in its first year, and "may increase in subsequent years."

Alger has asked President Bush to set a national goal of cutting gasoline consumption in half over the next 10 years. And the firm says the proposal needs to be adopted quickly in order to reduce America's dependency on Middle Eastern oil, which "allows U.S. motives to be questioned, fairly or not."

The money management firm says that one of the biggest issues for Americans is the soaring price of gasoline and that the prospects for lower gas prices are not likely due to increasing demand from U.S. consumers, as well as soaring demand from nations such as China and soon from India. Reducing gasoline consumption and increasing the nation's energy independence will enhance U.S. economic and military security and also ensure that the legitimacy of American foreign policy is not undermined by energy needs, the letter to President Bush says.

The proposal is a radical one: Beginning in 2008, any car or SUV that cannot meet a fuel efficiency standard of 30 miles per gallon will have to pay a tax of $1000 per year.  For each year that the vehicle continues to be driven, the tax will go up an additional $500 a year.  There are approximately 230 million passenger cars in the United States (140 million cars, 28 million SUVs, 38 million pick-ups, and 18 million vans and minivans), and a relative handful of these meet the proposed 30 mile-per-gallon standard. So will U.S. consumers sit still for a $1000 per year tax on each of their vehicles?  And will they accept a $500 a year increase in that tax each 12 months thereafter?

The Fred Alger executives contend that in the first year of this policy, the U.S. government could collect as much as $200 billion in revenue. But the ulterior motive for the tax is to spur the production of smaller, fuel-efficient cars, which will lead to less dependence of overseas sources of energy. Further, the firm suggests that the tax will create a need to replace vehicles that do not meet the higher fuel efficiency standards, leading to an increase in domestic auto production to as much as 22 million to 25 million vehicles. This, in turn, the firm says, will generate stronger Gross Domestic Product (GDP) growth.

Auto industry experts, however, feel this scenario is naïve.  Although American-based auto factories do have significant underutilized capacity to build vehicles, foreign manufacturers rather than domestic manufacturers are better positioned to provide high-fuel-efficient vehicles because they already build them for other markets, these experts say.  The plan could actually be a deathblow for the already struggling U.S. auto industry.

While the goal of reducing dependence on foreign sources of energy might be laudable, the medicine suggested might be too dangerous to take.

Driving Today Managing Editor Jack R. Nerad has been a student of the automobile industry for decades and writes frequently on economic issues.